USD/CAD softens below 1.3750 on Middle East optimism
- USD/CAD posts modest losses near 1.3720 in Thursday’s early Asian session.
- Traders assess the Israel-Iran ceasefire and the Fed’s cautious stance.
- Fed’s Powell said central bank needs to manage against the risk that tariff inflation proves persistent.
The USD/CAD pair trades with mild losses around 1.3720 during the early Asian session on Thursday. The Greenback remains weak as traders continue to assess the ceasefire in the Middle East and the cautious tone from Federal Reserve (Fed) Chair Jerome Powell.
US President Donald Trump said the United States (US) would hold a meeting with Iran next week but questioned the necessity for a diplomatic solution on Iran's nuclear program, citing the damage that American bombing had done to key sites, per Bloomberg.
Trump noted that the conflict was effectively “over” after the US bombing mission, though he also warned it could maybe start soon. Traders will keep an eye on the developments surrounding US-Iran talks and Middle East conflicts. However, any signs of escalation could boost the safe-haven flows, supporting the US Dollar (USD).
Fed Chair Jerome Powell said on Wednesday that Trump's tariff policies may well just cause a one-time jump in prices, but the risk that they could cause more persistent inflation is large enough for the Fed to be careful in considering further rate cuts. Fed officials still expect to reduce interest rates this year, but the timing remains uncertain as policymakers wait on coming trade deadlines and hope for more certainty about the scope of the tariffs.
Meanwhile, a fall in Crude Oil prices could drag the commodity-linked Loonie lower and cap the downside for the pair. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative impact on the CAD value.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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